CHAPTER 13 Variable Pay and Executive Compensation S E C T I O N Compensating Human Resources © 2008 Thomson/South-Western All rights reserved PowerPoint Presentation by Charlie Cook The University of West Alabama Chapter Chapter Objectives Objectives After you have read this chapter, you should be able to: ■ Define variable pay and identify three elements of successful payfor-performance plans ■ Discuss three types of individual incentives ■ Identify key concerns that must be addressed when designing group/team variable pay plans ■ Discuss why profit sharing and employee stock ownership are common organizational incentive plans ■ Explain three ways that sales employees are typically compensated ■ Identify the components of executive compensation and discuss criticisms of executive compensation levels © 2008 Thomson/South- 13–2 Variable Pay: Incentives for Performance Better performing employees should receive more compensation Some people perform better and are more productive than others Variable Pay Assumptions Part of compensation should be tied directly to performance and results © 2008 Thomson/South- Some jobs contribute more to organizational success than others 13–3 FIGURE 13-1 Examples of Incentives © 2008 Thomson/South- 13–4 Developing Successful Pay-for-Performance Plans Pay-forPerformance Plans Link strategic goals and employee performance Enhance results and reward employees financially © 2008 Thomson/South- Reward and recognize employee performance Promote achievement of HR objectives 13–5 FIGURE 13-2 Metric Options for Variable Pay Plans © 2008 Thomson/South- 13–6 Successful Variable Pay Plans Effective Incentive Plans Does the Plan Fit the Organization? Does the Plan Reward the Appropriate Actions? © 2008 Thomson/South- Is the Plan Administered Properly? 13–7 Why Variable Pay Plans Fail Plan incentives are not seen as desirable Plan doesn’t reward doing a good job Employees’ View of Variable Pay Plan Plan rewards teams/groups rather than individuals Plan doesn’t motivate Plan doesn’t increase base pay © 2008 Thomson/South- 13–8 Developing Successful Incentive Plans Develop clear, understandable plans that are continually communicated Use realistic performance measures Keep plans current and linked to organizational objectives Successful Incentive Plans Link results to payouts that recognize differences Identify variable pay incentives separately from base pay © 2008 Thomson/South- 13–9 Individual Incentives Necessary Conditions For Individual Incentive Plans Individual performance must be identified Individual competitiveness must be desired © 2008 Thomson/South- Individualism must be stressed in the organizational culture 13–10 Why Organizations Establish Variable Pay Plans for Groups/Teams Group/TeamBased Variable Pay Plans Improve productivity Tie pay to team performance © 2008 Thomson/South- Improve customer service or production quality Increase employee retention 13–14 Design of Group/Team Incentive Plans Group/Team Incentive Plan Issues Distribution of Group/Team Incentives Timing of Group/Team Incentives © 2008 Thomson/South- Decisions About Group/Team Incentive Amounts 13–15 Group/Team Incentives (cont’d) • Distributing Rewards Same-size reward for each member Different-size reward for each member • Problems with Group/Team Incentives Rewards in equal amounts may be perceived as “unfair” by employees who work harder, have more capabilities, or perform more difficult jobs Group/team members may be unwilling to handle incentive decisions for co-workers Many employees still expect to be paid according to individual performance © 2008 Thomson/South- 13–16 FIGURE 13-5 Conditions for Successful Group/Team Incentives © 2008 Thomson/South- 13–17 Types of Group/Team Incentives • Group/Team Results “Self-funding” pay plans for groups/teams that reward through improved organizational results on the basis of group output, cost savings, or quality improvement • Gainsharing (Teamsharing or Goal Sharing) The sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts Improshare Scanlon Plan © 2008 Thomson/South- 13–18 Organizational Incentives Profit Sharing Primary Objectives Drawbacks • Increase productivity and organizational performance • Disclosure of financial information • Attract or retain employees • Variability of profits from year to year • Improve product/service quality • Enhance employee morale © 2008 Thomson/South- • Profit results not strongly tied to employee efforts 13–19 FIGURE 13-6 Framework Choices for a Profit-Sharing Plan © 2008 Thomson/South- 13–20 Employee Stock Plans • Stock Option Plan A plan that gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time If market price of the stock is above the specified option price, employees can purchase the stock and sell it for a profit If the market price of the stock is below the specified option price, the stock option is “underwater” and is worthless to employees © 2008 Thomson/South- 13–21 Employee Stock Plans • Employee Stock Ownership Plan (ESOP) A plan whereby employees gain significant stock ownership in the organization for which they work Advantages Favorable tax treatment for ESOP earnings Employees motivated by their ownership stake in the firm Disadvantages Retirement benefit is tied to the firm’s future performance Management tool to fend off hostile takeover attempts © 2008 Thomson/South- 13–22 Types of Sales Compensation Plans • Salary-Only All compensation is paid as a base wage with no incentives • Commission Straight Commission Compensation is computed as a percentage of sales in units or dollars The draw system make advance payments against future commissions to salesperson Salary-Plus-Commission or Bonuses Compensation is part salary for income stability and part commission for incentive © 2008 Thomson/South- 13–23 FIGURE 13-7 Sales Metric Possibilities © 2008 Thomson/South- 13–24 Effectiveness of Sales Incentive Plans Frequent changes in sales plans An “entitlement” culture Pay without performance Causes of Ineffectiveness in Incentive Plans Poor quota setting Small differences in pay for top and bottom performers © 2008 Thomson/South- 13–25 Executive Compensation Executive Salaries Executive Benefits Executive Perquisites (Perks) Elements of Executive Compensation Annual Executive Incentives and Bonuses Performance Incentives: Long Term vs Short Term © 2008 Thomson/South- 13–26 “Reasonableness” of Executive Compensation Would another company hire this person as an executive? How does the executive’s compensation compare with that for executives in similar companies? Executive Compensation Considerations and Concerns Is the executive’s pay consistent with pay for other employees within the company? © 2008 Thomson/South- What would an investor pay for the level of performance of the executive? 13–27 FIGURE 13-8 Common Executive Compensation Criticisms © 2008 Thomson/South- 13–28 [...]... work Advantages Favorable tax treatment for ESOP earnings Employees motivated by their ownership stake in the firm Disadvantages Retirement benefit is tied to the firm’s future performance Management tool to fend off hostile takeover attempts © 2008 Thomson/South- 13–22 Types of Sales Compensation Plans • Salary-Only All compensation is paid as a base wage with no incentives • Commission